Hasbro posted a 2% gain in revenue to $1.58 billion in Q3 ended Sept. 29, falling short of analyst forecasts for $1.72 billion as strong sales of licensed products were undercut by the effects of threatened and enacted tariffs.

The U.S. Trade Representative’ s imposition of a 10% tariff on $300 billion in goods imported from China on Sept. 1 hit Hasbro’s games business, resulting in retailers canceling direct import orders and forcing the company to impose  price increases, said CEO Brian Goldner to analysts. To meet U.S. retail demand, Hasbro shifted to air freight and filled domestic orders from U.S. warehouses. Domestic shipments increased to 59% of retail orders from 51% a year earlier, while games sales declined 17% to $232 million.

Hasbro may face additional direct import cancellations and shifts to domestic orders as the Dec. 15 deadline for 15% tariffs approaches, Goldner said. The additional tariffs would be applied across most of Hasbro’s product lines and require another round of price increases, Goldner said. Jefferies analyst Stephanie Wissink said that Hasbro has “reclaimed a portion” of the cancelled orders already in the current quarter. The tariffs will have a 2% impact on annual revenue if Hasbro is able to reclaim half the $140 million it fell short of analysts’ Q3 estimates, says Wissink.

“The tariffs are short term in nature and have been disruptive” but are expected to be offset in 2020 as Hasbro shifts some production from China to India and Vietnam, Goldner said. China will account for less than 50% of Hasbro’s production by late 2020, down from 66% currently, Hasbro has said.

The impact of tariffs on Hasbro’s Q3 revenue was partly offset by a 40% gain in revenue from licensed products (referred to as “Partner Brands” in Hasbro’s report) to $427 million, well above analyst estimates for $395 million amid strong shipments of Frozen 2 and Star Wars products. The increased sales of licensed products boosted Q3 royalty expenses 21.6% to $128 million or 8.1% of revenue, up from 6.7% a year earlier. For the year, Hasbro is forecasting royalty expenses to be 8.5% of revenue.

Overall, Hasbro’s Q3 net income fell 19.3% to $213 million as sales of franchise brands declined 8% to $780 million Sales of emerging brands, which includes Power Rangers — acquired last year from Saban Entertainment — rose 1% to $136 million, short of analyst projections for $165 million.

Meanwhile, Hasbro’s proposed $4 billion acquisition of Entertainment One (eOne) is expected to close late this year pending regulatory approvals in Canada and the UK. EOne shareholders approved its sale last week. EOne’s brands — Peppa Pig, PJ Mask, Ricky Zoom and another dozen under development— will be “reimagined” with eOne staff handling  “story-telling” as Hasbro takes over the licensing, Goldner said. Under new ownership there will be “even more demand” for eOne’s IP in toys, games, consumer products and location-based entertainment, Goldner said.

Contacts:

Hasbro, Deborah Thomas, CFO, 401-431-8697